Учебный год 22-23 / Mistake, Fraud and Duties to Inform in European Contract Law (The Common Core of European Private Law)
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If we turn to the application of remedies for defective consent, the picture becomes more familiar, correspondingly more complex and less harmonious! Under Austrian, Belgian, French, German, Greek, Portuguese and Dutch law a mistake could be qualified here but is not necessarily operative. The Spanish reporter considered the possibility but rejected it: Spanish law interprets the excusable nature of the mistake quite severely and would consider the buyer’s behaviour inexcusable. This interpretation resembles the French and Belgian analyses. German law could contrive to find mistake whereas only Austria, Greece, Portugal and The Netherlands were really comfortable about admitting mistake here.
Another possibility presented itself in the form of contractual remedies. The question of whether there was a breach of contract was therefore considered by some countries that did not even consider mistake for obvious reasons, i.e. Norway and England, and also Austria, Belgium, and Greece on the basis of a hidden defect in the goods. Only Austria, Belgium and Greece considered a remedy would lie under this head. Likewise, Germany and the Netherlands considered whether non-conformity would give rise to a remedy; the former rejected the possibility whereas the latter admitted it.
Last, but certainly not least, there was a discussion raised by a number of reporters as to the relevance of fraud and/or good faith provisions as founding a duty to inform. Under Austrian and German law a claim would lie under the culpa in contrahendo provisions, subject to the usual balance between the duty to inform and the duty to make enquiries being met. Greece thought that if a duty to inform was established and the seller had actually concealed the information there would also be a case for fraud. A divergence of interpretation arises under Belgian and French law: the Belgian reporter thought there probably would be fraud here whereas the French analysis, arguing backwards from the compliance with statutory requirements suggested that the conditions of fraud might not be met.
This case produces some interesting and perhaps surprising results. Greater harmony has been achieved by the transposition of European directives, but not without cost. First, general remedies for defective consent appear to have been subsumed. This may be quite normal if they are considered to be subsidiary remedies. Secondly, however, one may wonder if the character of these remedies, not just their availability, may be changing. If the French illustration is a precursor of this evolution we might ask whether the general remedies for defective consent are
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going to be judged by the criteria of lex specialis, in which case their disappearance may just be a question of time. Lastly, a more harmonious result may go hand in hand with less overall protection if we count the number of legal systems that gave a remedy on the facts: four or perhaps five countries would admit a remedy in mistake and four (two of which admit both) in fraud or on good faith provisions. Are the objectives of consumer protection being met? If so, it is not clear that we have moved a long way away from the common law’s position of caveat emptor, which is somewhat surprising.
Case 9
Nell v. Scrooge Bank
Case
When Scrooge Bank told David it was not prepared to give him a loan for his business without a personal guarantee, he did not dare tell his wife Nell. Instead, he explained that he was taking a short-term loan from the bank that required her to sign the loan document as secretary of his one-man company. Trusting David, Nell went to the bank and signed what subsequently proved to be a personal guarantee for David’s business. Now that David’s business has been declared insolvent, Scrooge Bank has called in the guarantee against Nell. What remedy, if any, is available?
Discussions
Austria
(i) In the case in discussion Nell has made a mistake of expression which is also a mistake as to the content of the contract in the broad sense. However, the question of whether the mistake is fundamental must be considered. The mistake will be considered important if the mistaken party, namely Nell, would not have concluded the contract had she known the true facts. Clearly, here Nell would not have agreed to conclude the contract of guarantee. Nell cannot, however, hope to succeed in contesting the validity of the contract, since none of the requirements stated in § 871 ABGB is fulfilled. The persons acting for Scrooge Bank were in no way responsible for causing Nell’s mistake. Moreover they could not have been aware that Nell had made a mistake since she did not mention her intentions to them. Finally, Nell did not point out her mistake in time, since the bank has already paid
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out the loan by relying on the fact that the contract of guarantee is valid.
(ii)Nell’s mistake was not caused by the other party to the contract but by a third party, namely her husband David. Generally the validity of a contract will not be influenced by the behaviour of a third party even when this influence leads to a contracting party making a declaration with defective consent as a result of a fraudulent misrepresentation (§ 875 ABGB). This is the result of the so-called ‘reliance theory’1 whereby a declaration of intent has to be seen and understood according to the standard of an honest recipient’s behaviour. There are exceptions but only in cases where the other contracting party is not worthy of protection. § 875 ABGB therefore entitles the mistaken party to annul if the other contracting party has participated in the third party’s behaviour or should obviously have known about it. According to prevailing scholarly opinion and case law, people who are used as a sort of accomplice by one of the contracting parties during the negotiation of the contract are not to be considered third parties in the sense of § 875 ABGB.2 As David is not an accomplice of Scrooge Bank and none of the requirements of
§875 ABGB is fulfilled, Nell cannot invoke the invalidity of contract of guarantee on this ground.
(iii)Under § 25c KSchG (Law regulating consumer rights) the owner of a business, which extends or gives loan facilities (the ‘lender’), is obliged to refer to the economic situation of the debtor in the case of a consumer becoming a co-debtor or a surety and in this case the lender is aware or should be aware that the debtor is probably not able to repay his debts in whole or in part. If the lender does not disclose this information then the consumer is only liable if he would have assumed the same liabilities despite being properly informed. In the present case Nell was given no information at all by Scrooge Bank about David’s financial situation, yet the bank, must, however, already have been aware of the critical financial situation of David’s one-man company. As already stated, it must be assumed that Nell did not intend to sign a contract of guarantee, all the more so if she had been informed about David’s critical financial situation. Therefore, Scrooge Bank cannot enforce the guarantee against Nell since they have not complied with the disclosure requirements under specific legislation.
1 Rummel, § 871 Rz 1.
2Gschnitzer in Klang IV/1, 129: Iro, JBl 1982, 470 and 510; OGH 19.10.1989 JBl 1990, 175; OGH 21.3.1991; JBl 1991, 584.
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Belgium
Two general remedies may be considered since Belgian law has not experienced the same case law’s development of art. 1326 of the Civil Code as in France, and no specific obligation incumbent on the bank to inform its customers exists either:
(i)Can Scrooge Bank be considered liable for fraud (see Case 1) toward Nell? The problem here is that fraud must emanate from a party to the contract, which does not appear to be the case at first glance here since the fraudulent statements emanated from a third party to the contract, that is the principal debtor, David. There are, however, two ways out for Nell to show that (a) the bank was in some way an accomplice to David’s fraud;3 and (b) the bank had committed fraudulent concealment when entering into the contract. We have already seen that the existence of an obligation to inform incumbent upon a party derives from legislation, usage, the professional situation or the specific position of the defrauding party or circumstances. Thus, a contract of guarantee made by an institution of public assistance (Centre public d’aide sociale) was annulled on the ground that the guarantor was not in a position to assess the extent of his obligation correctly and that the CPAS should have carried out an enquiry and should have informed the guarantor.4 This case is however very specific on its facts: the guarantor was probably in a very weak position and the CPAS is not supposed to act like a bank. In Nell’s case, it seems quite unlikely that a court will hold the bank liable for fraudulent concealment. Therefore, where a mistake provoked by a third party to the contract (here David) excludes an action based on fraud, only an action based on mistake is admissible.5
(ii)The difficulty here lies in the requirement that the mistake be excusable (see Case 1). In an unreported decision6 of the Court of Appeal of Brussels,7 a contract for a joint and several loan facility had been entered into between a bank and a married couple, the wife having been led to sign in the belief that she did so only to satisfy some (non-existent) requirement of authorisation relating to the law on matrimonial property. When an action was brought by the bank against the wife after her
3 Goux, ‘L’erreur, le dol et la lésion qualifiée’, no. 15. 4 Antwerp, 4-11-1997, RGDC, 1998, p. 367.
5 Goux, ‘L’erreur, le dol et la lésion qualifiée’, no. 28.
6Unreported decisions are equivalent to reported decisions in Belgium since case law reporting is not official. This may be contrasted to the situation in France where
unreported decisions do not enjoy the same value as reported cases. 7 Brussels, 3-11-1993, RG 476/91.
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husband’s insolvency, she invoked a fundamental mistake (insisting on the fact that the loan was obviously devoted to cover the needs of her husband’s business and not her own). The court held that the existence of a mistake was not proven and, even if it had been, it would have been inexcusable, considering that the wife was a sufficiently well-educated person (she was a maths teacher in a secondary school) to have informed herself as to the extent of the obligation that she undertook. In Nell’s case, the problem of excusability is even more troublesome because, as a secretary of her husband’s company, she might be considered even more capable of informing herself about the meaning of business transactions for which her cooperation is required. Nell’s remedy based on mistake is therefore unlikely to succeed.
England
It seems likely that Nell can resist payment under the guarantee. The starting point is to observe that there was no misrepresentation made by Scrooge Bank to her, which might found a remedy under the principles discussed in Case 1; nor is there a sufficient mistake here: the bank knows the real transaction and -- we may assume -- does not know of her mistake. English law recognises a doctrine of non est factum, under which a written contract can be void if the party was unable to understand the document, and the document embodied a radically different transaction from that which he thought he was signing,8 and he was not careless in making the mistake: but this is difficult to establish and appears not to be satisfied here.
However, a contracting party (such as the bank here) might be affected by a misrepresentation made by a third party (here, David). If the bank used David as its agent in obtaining Nell’s signature, it would be treated as if it had itself made the misrepresentations: but this appears unlikely here, since Nell attended at the bank to sign. Alternatively, Nell could avoid the guarantee against the bank if the bank had knowledge or notice of the misrepresentations made by David. The courts have developed a special rule for cases involving bank guarantees: in addition to the general rule (under which a contracting party is affected by actual knowledge of a misrepresentation or undue influence by a third party), in the case of a bank guarantee where -- as here -- the relationship between the surety and debtor is non-commercial, the bank is ‘put on inquiry’ of the risk that the debtor might have made misrepresentations to, or
8 Saunders v. Anglia Building Society [1971] AC 1004.
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exercised undue influence over, the surety; and therefore it must take steps to bring home to the guarantor the risks that she is running by standing as surety -- and if the bank does not take these steps it is deemed to have notice of any claim that the guarantor might have that the transaction was procured by undue influence or misrepresentation on the part of the debtor.9 On the facts here, therefore, Nell will be able to avoid the guarantee on the basis of David’s misrepresentations unless Scrooge Bank discharged its duty to bring home to her the risks that she was running by signing the guarantee. The bank is not required to interview Nell privately (without David being present) and explain to her the nature of the transaction, although it can discharge its duty in this way. But it is sufficient if the Bank advised her to take independent advice, and received confirmation from a lawyer acting on her behalf that he has advised her. It appears that Scrooge Bank did not explain the document to Nell when she attended to sign it; nor did they advise her to obtain independent advice about the transaction. If so, the bank is unable to enforce the loan against her.
France
In this case Nell, the guarantor, signed the contract of guarantee after her husband’s lie had induced a mistake in her mind as to the true nature of her commitment. She may therefore invoke remedies under specialised legislation as well as for defective consent.
(i) Articles 341--2 and following of the Consumer Code (in force since 5 February 2004 and incorporated in the Code by the Law ‘Dutreil’ of 1 August 2003) give a reinforced protection for ‘all physical persons’ guaranteeing a loan, regardless of its nature, whether for business or consumer purposes.10 Nell can therefore rely on the protection offered by the Consumer Code which first imposes that a certain number of formalities be respected when the contract of guarantee is signed.11 If the necessary formalities have not been respected, the guarantee will be
9Royal Bank of Scotland plc v. Etridge (No. 2) [2001] UKHL 44, [2002] 2 AC 773 at [87] developing and explaining the earlier decision of the House of Lords in Barclays Bank
plc v. O’Brien [1994] 1 AC 180, after which this special rule is often named.
10Before this law, art. 313--10 of the Consumer Code applied a similar protection to guarantors guaranteeing a consumer credit loan or guaranteeing a loan relating to real property given by a professional lender to a consumer.
11Article 341--3 states that the amount of the capital, and interest of the loan guaranteed as well as the amount of liquidated damages, payable on late repayment, must be preceded by a manuscript note to ensure that the surety is aware of the amount of the guarantee and what it entails.
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void. As it is not clear from the facts whether or not this is the case, further possibilities must be considered.
(a)Nell may be able to invoke art. 341--4 of the Consumer Code, which states that if the guarantee is disproportionate to her capital and income at the time the contract was concluded, the lender cannot rely on the guarantee and call it in after the principal debtor’s, i.e. David’s, default. There is insufficient information to determine whether this is the case here and this is a question of fact. It is plausible to argue that Scrooge Bank would have checked Nell’s financial situation otherwise there would have been no point in asking her to guarantee the loan. In any event, under the new law, Scrooge Bank should have verified Nell’s situation otherwise it runs the risk of not being able to rely on the guarantee contract.
If Nell can prove that the guarantee was disproportionate to her capital and income when she entered into the contract, the guarantee is not void, but Scrooge Bank cannot call in the guarantee.12 It is not yet clear to what extent this new concept of proportionality differs from that created by case law under the general provisions of the Civil Code in the case of Macron,13 although a certain amount of speculation as to the differences exists.14
(b)Article 341--6 of the Consumer Code puts Scrooge Bank under an obligation to inform Nell annually, by 31 March at the latest, of the outstanding amount of the loan guaranteed as at 31 December of the previous year, i.e. the capital and interest etc. due as well as the length of the remaining term. If the loan has been guaranteed for an indeterminate period then the lender must remind the surety of his option
12The lender’s inability to rely on the guarantee means that it is deprived of its right and this constitutes a kind of ‘peine’ or punishment, called a ‘déchéance’ in French law. For an example of the mechanism, in the context of a surety given for a consumer credit loan, see Civ 1, 22 October 1996, JCP 1997, jp. 22826, note S. Piedelivère.
13Com, 17 June 1997, D. 1998, jp. p. 208, note J. Casey. RTDCiv 1998, p. 157, 935 ff., obs. P. Crocq. The lender was held liable for a faute and was liable in damages to the guarantor, which had the effect of reducing to nearly nothing the amount of the guarantee due, since the damages offset the amount due under the guarantee. The faute of the lender was not a failure to inform but the very fact of asking for a guarantee that was disproportionate for the guarantor was held to be contrary to good faith and meant that the lender must bear the risk, not the surety. This imposes a high standard of behaviour on the bank which was considered not to have acted in good faith.
14It appears that the remedy is different since case law allowed the courts to adjust the amount owing whereas the new law has the effect of abolishing the guarantor’s liability. See for a very helpful overview, D. Fenouillet, Revue des contrats 2004 (2),
pp. 305 ff.
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to revoke the guarantee. If the bank fails to respect this obligation, it cannot claim interest due or a penalty for late payment until it fulfils its statutory obligation to inform.
However this will not help Nell much since the guarantee contract is not annulled. A breach of this obligation simply means that the bank will lose a penalty and/or interest for late payment and Nell will still be liable under the guarantee.15
(ii) Nell can also try to annul the guarantee and/or claim damages on the grounds of defective consent.
(a)Nell may first think of claiming that she made a mistake when she signed the guarantee contract. If Nell is considered to be a layperson, rather than acting in the course of business since she is secretary of the company, her chances of success will be higher. If Nell can prove that she was mistaken as to the nature of the document she might succeed, provided that it is not held that her mistake is inexcusable. However, it is going to be difficult to prove that she was mistaken; if the document clearly indicated the nature of her undertaking, how can Nell prove that she did not read it? By analogy, if Nell could prove that she thought she was signing a loan document that was given to David who was solvent, she could try and prove she had only signed on the condition that David was solvent whereas in fact he was not.16 However, it is not clear from the facts that David was insolvent when the contract of guarantee was concluded so this argument might not succeed. To resume, Nell’s chances of proving mistake are slight.
(b)Nell could allege that the bank has deliberately failed to inform her of David’s irremediable financial situation and has thus fraudulently concealed the truth thus provoking a mistake, under arts. 1116 and 1134, line 3 of the Civil Code.17 She cannot of course allege David’s dishonesty since he is not party to the contract and his behaviour cannot bind Scrooge Bank except if they were acting in collusion and the bank knew of David’s fraudulent manoeuvres. By extension to fraudulent concealment, it has even been inferred, a contrario, from the Cour de cassation’s
15See V. Avena-Robardet, ‘Reforme inopinée du cautionnement’, D 2003, p. 2083, especially pp. 2086 ff.
16The Cour de cassation has recently been more generous with this argument and has finally admitted that a mistake about the solvency of the principal debtor may be operative even if it is a tacit condition of the guarantor’s engagement; see Com,
1 October 2003, D 2003, jp. p. 1607, note Y. Picod.
17For an example, see Civ 1, 13 May 2003, D 2003, jp. p. 2309. In this case even though the bank had included an exclusion clause about the condition of the guarantor’s engagement, it was still held liable for fraudulent concealment.
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decision in Nahoum,18 that a lender may have a positive duty to inform a guarantor if the latter was not aware of certain information relevant to signing the guarantee. To succeed, Nell will need to show that her ignorance of the true situation was legitimate, i.e. as secretary of the company she was not expected to know about its financial situation.19 However, once again, it is not clear that the bank knew that David’s situations was disastrous, nor even that it was in fact disastrous at the relevant time, so it might be difficult to prove fraudulent concealment or a positive duty to inform incumbent on the bank.
It is too early to tell whether the case law decided before the new law will be relegated to history or in other words how the general and special law now fit together. The recent provision protecting sureties has been criticised because it has been inserted into the Consumer Code whereas its scope is much wider than consumer protection. Has the development of the duty to inform been instrumental in making the law recognise the idea of a general contractual imbalance? In any event, the new duty to inform, contained in the Consumer Code, is pretty limited and would not be that helpful to Nell who would remain liable for most of the principal debt. Paradoxically, the old general law of defects of consent might be more protective, in the event that she could not rely on other provisions of the Consumer Code.
Germany
This case touches on two legal issues: first whether and how the fraud of a third party enables the contract to be annulled and secondly, whether a statement of guarantee given by an impecunious close relative is immoral.20 Because the facts of the case do not indicate whether Nell has her own income or property this second question will not be analysed.
(i) Nell was certainly induced into giving the statement of guarantee to Scrooge Bank by David’s misrepresentation. However, she cannot automatically annul her statement. If misrepresentation was made by a third party then § 123 II only allows annulment if the recipient of the declaration was aware or must have been aware of the misrepresentation. The facts do not offer any evidence that this was the case. Nevertheless, the requirement that Scrooge Bank must at least have been aware
18Com, 8 October 2002, D 2003, p. 414; note Koering. Confirmed in Com, 25 March 2003, Com, 11 June 2003. See D. Fenouiller, Revue des contrats 2004 (2), pp. 315--16.
19Com, 5 December 2000, see V. Avena Robardet, D 2003, jp. 2308.
20Cf. numerous instances of this in the BGH’s case law in Palandt/Heinrichs, § 138 para. 38--38c.